A NASDAQ Horror Movie About To Begin?

The movie Top Gun was a huge hit in 1986 and in 2022. That’s quite a feat. Kenny Loggins’ Danger Zone is the movie’s theme song. The opening refrain is…

Highway to the Danger Zone

Ride into the Danger Zone

After last Friday’s meltdown on big volume, Kenny Loggins’ hit song could double as the theme song for the NASDAQ’s current technical position. Although the song was a chart topper and Top Gun was popular with moviegoers, the script the index could write might get awful reviews, really Rotten Tomatoes.

For the last three weeks or so, we’ve pointed out the potential plot of a head and shoulder pattern, which is typically a reversal pattern. Meaning, if stocks were heading higher, as they have been, the completion of a head and shoulders could trigger a decent sized selloff.

We aren’t quite there yet, but the villain has the upper hand now. The NASDAQ broke its recent, ascending trendline and failed to move to a cycle high, which is a bright yellow flag. A major test of support is right below. If the NASDAQ slips, and closes below 13,600, then the head and shoulders pattern comes into full focus.

The key line for the technical pattern is its “neckline, which connects the bottoms of the left shoulder and the head. If the neckline at 13,200ish fails to hold, that’s when the setup has run its course and the next wave begins, most likely lower, perhaps a lot lower in this case.

Examining the NASDAQ’s chart, the rising 200-day moving average of 12,429 appears to be the most logical storyline. There are only a couple of minor support levels below the neckline, first at 13,000 and then at 12,700sih.

That’s the bad guy winning scenario and that doesn’t happen in Tom Cruise movies. For the protagonist bulls to triumph, the NASDAQ will need to bust through the 50-day average and then resistance in the neighborhood of 14,100. If our hero can bully its way past its technical foes, then it has a shot to end the story on a high note and challenge its recent highs at 14,400. Beyond that, bulls save the day and ride off into the sunset with the heroine as the credits roll.

SECTOR WATCH

SPDR S&P 500 ETF Trust (SPY) outperformed Invesco QQQ Trust (QQQ) for the second week in a row. Although it’s not an absolute dealbreaker, our preference is QQQ leads the way. It’s been our experience that weakness is more prevalent when QQQ underperforms the senior indexes.

SPDR S&P Metals and Mining ETF (XME) was the week’s top performer with energy and interest rate sensitive sectors/industries taking up the top 10 spots on our leaderboard. Energy is not surprising considering Oil appears to be on its way to triple-digits again, ugh at the pump.

Commodity prices like gold are on the rise as well. It could be a sign that Wall Street anticipates another wave of overheated inflation. We sure hope not, prices are too damn high already, to paraphrase New York activist and politician Jimmy McMillan.

With the NASDAQ in the head and shoulders Danger Zone, investors might be wise to be patient and not jump the gun buying the dip. If the neckline breaks, a possible 1,300-point drop would likely pull most if not all sectors lower.

STOCK WATCH

At this point, there is no way we’d entertain adding new positions to this space.

Rich Meyers